Lessons from a flat tire – gaining perspective on market volatility

Is recent market volatility making you anxious? Gaining some perspective could help relieve that anxiety and ensure that you remain on track to reach your financial goals.

Your financial journey is a lot like a long road trip. On your route from point A to point B, even while driving wisely, it is normal to experience traffic signals, curvy roads, or bad weather that may slow you down. You might hit a pothole or nail that causes a flat tire. If you get a flat tire, sure your trip stops temporarily, but you do not abandon your car and walk to your destination. You simply replace the tire with a spare and continue your journey. You are prepared for the uncertainties and know that by reviewing your planned route and sticking with your vehicle, you will arrive at your destination sooner than if you’re walking, even if that requires altering the path along the way.

Likewise, investors planning for retirement and those already in retirement should take the same approach with their investments: be prepared for the uncertainties you cannot control, do not make hasty short-term decisions that turn temporary setbacks into more permanent issues. It is natural to feel some apprehension when stock markets lose ground, but such fluctuations are a normal part of investing. Discarding your long-term strategy is like pushing your car off a cliff when you get a flat tire…you lock in losses and likely miss the eventual recovery. Those who lack guidance and a long-term plan tend to feel more panicked during rough markets; it’s hard to stick with a strategy if you don’t have one.

As of the end of 2018, some stock market indexes have dropped about 20% from their highs, while others have fallen less. “Bear markets” are not uncommon, and the market typically bounces back within 18 months (see the up/down pattern in the chart below, from our recent Quarterly Context video). What’s causing the current market volatility? Primarily, it is the cyclical yet unpredictable stock market “weather,” driven by economic and political uncertainties. Current market fluctuations may be more uncomfortable for some, as volatility has been relatively low in the last six years. In some cases, it could be an investor’s first real experience with negative markets.

For those who are still accumulating assets, it may be helpful to remember that volatility can actually help increase wealth. If the market is down while you are adding to your investments, you are buying at lower prices, as though the market is “on sale.”

Remember too, that getting out of the market and attempting to wait out the turmoil in cash is historically much riskier to your goals in the long run. Not only will cash not keep up with inflation, but only in retrospect can you determine the best time to get back to your long-term strategy. Is there a place for cash in your financial picture? Yes, cash should be used for the portion of money you plan to spend in the near-term. If you are already retired, you will want to have reserves in cash and short-term bonds to cover a few years of spending, depending on your other sources of income.

Declining markets and extreme volatility require patience and confidence in your long-term financial plan. As Warren Buffett once said, “The stock market is a device for transferring money from the impatient to the patient.” It’s not always easy to stay calm and follow this mantra, but if you do you’ll have success stories to tell in the long run.